Find answers below to some of the most frequently asked questions regarding mortgages.
For any questions not answered below, please reach out to our mortgage specialists at (314)212-1500.
The amount of loan for which you qualify is based on two different calculations. Using what are known qualification ratios, lenders evaluate your income an long-term debts to determine a “safe” amount for your mortgage payments. A fairly standard ratio is 28/36.
With a 28/36 ratio, you are allowed to spend up to 28% of your gross monthly income for mortgage payments. The lender will then run a different calculation. This one is your loan payments and your debt payments combined, which may not exceed 36% of your gross monthly income.
To calculate exactly how much you may borrow, you will need to estimate your interest rate.
As part of the calculation, you also need to estimate and include the property taxes, homeowner’s insurance, and homeowner association fees (if applicable) you might need to pay, which are considered part of your monthly expenses. Please see our mortgage calculators to get an estimate of your loan amount.
Even if you have excellent credit, it’s wise to double check at the outset. Straightening out any errors or disputed items now will avoid troublesome holdups down the road when you are waiting for mortgage approval. You may see disputed items, in addition to errors caused by a faulty Social Security number, a name familiar to yours, or a court ordered judgment you paid off that hasn’t been cleared from the public records. If such items appear, write a letter to the appropriate credit bureau. Credit bureaus are required to help you straighten things out in a reasonable time (usually 30 days).
Most lenders offer financing programs that allow the borrower to finance up to 100% of the sales price of the new home. However, if no down payment is made, the borrower will be required to pay private mortgage insurance (PMI), (see question 10). If you can afford to put more money toward a down payment, it will reduce the amount of your monthly mortgage payments. Some loan programs offer 3% down payments if you meet certain income standards. The Veterans Adminstration (VA) and the Rural Housing Service (RHS) also offer no-down payments loans. The lender will want to know how much money you plan to put down and the source of those funds. Sources you many draw upon include savings, stocks and bonds, pension funds, real estate holdings, life insurance policies, mutual funds, and employee savings plans.
You may also use gift money from a family member that need not be repaid. If you do this, you will need to present a letter to your lender that states the amount of the gift, is signed by the giver, and is notarized by a third party. A gift letter “form” may be obtained from your lender.
You are also now allowed to withdraw up to $10,000.00 from both traditional and Roth Individual Retirement Accounts (IRAs) with no early withdrawal penalty, if used toward buying your first home.
Under some mortgage programs, such as Fannie Mae’s Community Home Buyer’s Program with the 3/2 Option, part of your down payment may come from a grant from a nonprofit housing provider in your community.
Interest rates are usually expressed as an annual percentage of the amount borrowed. You can choose a mortgage with an interest rate that is fixed for the entire term of the loan or one that changes throughout. A fixed-rate loan gives you the security of knowing that your interest rate will never change during the term of your loan. An adjustable-rate mortgage (called an ARM) has an interest rate that will vary during the life of the loan, with the possibility of both increases and decreases to the interest rate and consequently to your mortgage payments.
Annual Percentage Rate (APR) factors interest plus certain closing costs, any points and other finance charges over the term of a loan. The APR must be disclosed to you according to Federal Truth-in-Lending laws within three business days of when you apply for a loan, or prior to or at closing for a refinance.
On the day you actually buy your new home, in addition to your down payment, the prepaid property tax and homeowners insurance premiums, you’ll need cash for various fees associated with the purchase. These expenses are known as closing costs and are paid by both the buyer and the seller. Some of the closing costs you pay up-front when you apply for a mortgage loan. Those include money for a credit check on all applicants and an appraisal on the property. Keep in mind that even if you don’t eventually receive the loan, that money is not refundable.
Other closing costs are possible and should be considered when evaluating your financial situation. These may include, but are not limited to:
- Title insurance fee
- Survey charges
- Loan origination fee
- Attorney fees or escrow fees
- Document preparation fees
- Points-up-front (interest paid in return for a lower interest rate). Each point is one percent of the loan amount. Sometimes you can contract for the seller to pay your points.
In the special vocabulary of mortgage lending, “points” are a type of fee that lenders charge (the full term to describe this fee is “discount points”). Simply put, a point is a unit of measure that means 1% of the loan payment. So, if you take out a $100,000 loan, one point equals $1,000.00.
Discount points represent additional money you can pay at closing to the lender to get a lower interest rate on your loan. Usually, for each point on a 30-year loan, your interest rate is reduced about 1/18th (or .125) of a percentage point.
Tip: Usually, the longer you plan to stay in your home, the more sense it make to pay discount points.
If you put less than 20% down on most loans, you’ll be asked to protect the lender by carrying private mortgage insurance (PMI). Carrying PMI ensures that the debt is repaid if you default on the loan. This charge can add approximately an extra half a percent onto the loan.
FHA mortgages, in return for their low-down-payment requirements, also charge for mortgage insurance premiums (MIP).
The account in which Royal Banks of Missouri holds the borrower’s escrow amount to pay property expenses, such as property taxes or homeowner’s insurance.
When you originated your loan, the terms were based upon the establishment of an escrow account for taxes and insurance. Under normal circumstances, this requirement is not waived. Should you believe extenuating circumstances exist, please call (314) 212-1500 and ask to speak with a mortgage specialist.
Shortages in your escrow account occur due to an increase in your taxes, insurance or both.
100% replacement cost of the insurable value determined by the property insurer.
An additional charge that a borrower is required to pay as a penalty for failure to pay a regular installment when it is due. For example, if your loan is due on the first of each month, you have until the 16th to have a payment in our office without a late charge being added to your account.